Watch out for capital-gains distribution Buying, selling of stocks have tax consequences

November 30, 1997|By Jerry Morgan | Jerry Morgan,NEWSDAY

This year's roller-coaster stock market means that your mutual fund manager probably bought and sold more stock than usual. And that means you may get a larger capital-gains distribution from your fund company this year, as well as a bigger tax bill.

"I suspect there will be more turnover of technology, financial services and leading multinational company stocks, like Coca-Cola and Gillette, because of the volatility of the market," said A. Michael Lipper, president of Lipper Analytical Services Inc. of Summit, N.J. Those kinds of stocks are held by many general mutual funds as well as sector funds, so the effect should be widespread.

If all your funds are in 401(k) or individual retirement accounts, which are tax deferred, you don't have to worry about the tax man. But if you have money in taxable accounts, you had better hope the fund manager sold at a time that will get you the lowest capital-gains rate. But don't bet on it. Fund managers usually trade shares when they think they should, regardless of the tax consequences.

Anyway, you'll find out in January when you get the 1099 tax form from your fund company. This is the form that tells you what your capital gains were and at what rate they will be taxed -- thus, how much you owe.

Last year it was simple. You paid your ordinary tax rate, up to 39.6 percent on shares held less than a year, or you paid a 28 percent capital-gains rate on securities held more than 12 months. Easy.

Then came taxpayer relief. Short-term capital-gains tax rates remain the same. But the fund companies now have to figure out how long they held securities that were sold from May 7 through July 28. If it was for more than 12 months, the gains are to be taxed at a 20 percent rate. But those held longer than 12 months and sold before May 7 face a 28 percent rate; between 12 and 18 months, sold after July 28, a 28 percent rate. Securities held more than 18 months after July 28 will be taxed at 20 percent. (Those who qualify for the 15 percent tax bracket pay only 10 percent.)

So the computers had to be reprogrammed. "It is a complex programming to have to track all the stocks in all the funds," said Sue Bishop, a spokeswoman for John Hancock Funds in Boston, echoing the experience of other fund companies.

In the forms they send you, the funds don't have to break out numbers for each transaction, said T. Rowe Price Vice President Steven Norwitz. They will just provide the cumulative totals: so much taxed at 28 percent, so much at 20 percent.

But with new 1099 forms this year, the fund industry wanted to make sure that investors, who often own funds in more than one fund company, get reports that read alike.

"We tried to create a format so that everyone uses the same language to treat the different categories of gains," said Elizabeth Powell, public information vice president for the Investment Company Institute in Washington, the mutual fund industry's trade group. "The IRS also agreed to it," she said.

"It is really not too complicated," said Kenneth Sandgren of Dreyfus Corp. in New York. "We'll be using a form that will let shareholders take the numbers right off the 1099 form and onto the Schedule D [of the 1040 federal tax form] without having to do any math."

Pub Date: 11/30/97

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